Sunday, April 11, 2010

The Greatest Story Never Told

**I am not a financial advisor, I recommend speaking with one before making any investment decisions**

In April of last year I wrote an article titled, The Greatest Investment The World Has Ever Seen.  Due to some incredible news in the precious metals market over the past few weeks, I would like to write Part II of that article, as the saga has revealed groundbreaking new information.

I would recommend reading Part I before we move forward to get a brief foundation on precious metal price manipulation.

I have been investing in precious metals since the fall of 2005.  Over that period I have ridden the rollercoaster of prices rising, falling, and rising again.  Investing in metals is what originally sparked my interest in understanding monetary, financial, and economic history.  I have read what seems like an endless amount of financial information.

I made my first silver investment when prices were at $7.20.  Over the past 5 years I have seen the price explode up to $22 and come crashing back down to $8.  The ride up was exhilarating, the falls were excruciating.  Over time I continued to read, study, and learn.

I now pay very little attention to the price.  I concentrate on the number of ounces that I own, not a dollar amount.  If silver falls by 50% tomorrow I look at that as a good thing because I can now purchase twice as many ounces as I could the day before.

Some of the main topics I discuss on this site are government deficits, money printing, and a poor economic environmentt.  These three create a dream investment for a precious metals investor.  However, there is a fourth element that has been present during this bull market, the one that makes this the greatest story never told.

The precious metals markets are tiny in size when looking at the total number of physical ounces that can be traded.  However, surrounding the small physical market there is an enormous paper market that makes bets on the direction of prices.

Prices are determined by their demand on the COMEX.  (Chicago Mercantile Exchange)  If an investor purchases an ounce of gold from the COMEX it is the responsibility of the exchange to have that ounce of gold available for delivery should the investor want it.  Many precious metal investors have claimed over the years that the COMEX does not have all the gold it has promised.  If a large number of investors asked for the metal, it would default and not be able to deliver.  For years this has been something of a folk tale. 

That was until two weeks ago. 

A rogue London trader named Andrew Maguire contacted representatives of the CFTC (Commodity Futures Trading Commision - they oversee the COMEX) to show them how manipulation of the market was taking place by a few large banks; one in particular.  He told them the exact time that enormous sell orders would take place on the COMEX and showed how the banks would take down the price to profit.

He did this on multiple occassions.  The CFTC paid no attention to Andrew, so he decided to send the information to a private organization.  That group took it public over the past few weeks and the story has exploded. (You will not hear about it on the mainstream news, similar to how no one heard about subprime until the story was over)

Two weeks ago the CFTC held a hearing to determine the risk to the COMEX from these naked short positions held by the few large banks that hold them. After hearing from multiple witnesses, some called to defend the banks, all of them testified that there were approximately 100 paper metal shares traded for every 1 real ounce backing those paper shares.

Let me help explain. You have called the COMEX and asked to purchase some gold or silver trusting that your money is now backed by gold or silver in a bullion vault. However, what investors do not realize is that they have just signed up for a game of musical chairs.

There are 100 investors that have purchased 1 ounce of gold, however, there is only 1 ounce available in the vault for those 100 investors. When they try to sit down, or take delivery, 99 out of 100 will not be able to collect.

You can listen to an interview with Andrew telling his account of the events here.

And you can listen to an interview with the organization that brought the story to light and testified at the CFTC hearing here.

You can read the full letter sent by the whistleblower Andrew Maguire here.

So what does this all mean?  It means you are currently staring at the greatest investment opportunity of our lifetimes.  Far greater than the dot com mania or the real estate mania.  When this bull market turns manic, and investors realize there is no metal available to purchase, there is no limit to how high gold and more specifically silver prices will rise.

The crucial factor if you decide to purchase metal is to make sure you have a chair to sit down in when the music stops.  You want to have real metal, not a paper promise.  I have recommended ways to purchase metal on the link to the right, "what should I invest in today."

Let me give you a word of caution:  The metals market is like riding a bucking bronco.  Prepare for massive price swings along the way.  I would recommend focusing on accumulating a specific number of ounces, not a dollar price target.  This way you can view pull backs as what they are: opportunities.

When will investors get nervous and ask for delivery?  I have no idea.  It could be this week.  It could be five years from now.  All I know is the longer the ponzi scheme continues, the longer I have to purchase precious metals at fire sale prices.  I welcome the naked short positions from the large banks with open arms.

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